The annual rates from year 1 to year 4.

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Answer 1

Question

Chapter 2, Problem 14P

Summary Introduction

To determine: The annual rates from year 1 to year 4.

Expert Solution

Answer to Problem 14P

The current rate of one-year is 5.65%, two-year is 6.22%, three-year is 6.47% and four-year treasury security is 6.67%.

Explanation of Solution

Determine the current rate of one-year and two-year treasury security

The current rate of one-year treasury security is already given, which is 5.65%.

Current Rate2−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%))(12)−1]=[1.062234−1]=0.062234 or 6.22%

Therefore, the current rate of two-year treasury security is 6.22%.

Determine the current rate of three-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2)×(1+Expected RateYear 3+Liquidity PremiumYear 3))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%)×(1+6.85%+0.10%))(13)−1]=[1.064651−1]=0.064651 or 6.47%

Therefore, the current rate of three-year treasury security is 6.47%.

Determine the current rate of four-year treasury security

Current Rate3−Year=[((1+RateYear 1)×(1+Expected RateYear 2+Liquidity PremiumYear 2)×(1+Expected RateYear 3+Liquidity PremiumYear 3)+(1+Expected RateYear 4+Liquidity PremiumYear 4))(1n)−1]=[((1+5.65%)×(1+6.75%+0.05%)×(1+6.85%+0.10%)×(1+7.15%+0.12%))(14)−1]=[1.066657−1]=0.066657 or 6.67%

Therefore, the current rate of four-year treasury security is 6.67%.

Summary Introduction

To determine: The yield curve for the current rate.

Expert Solution

Explanation of Solution

The yield curve is as follows:

EP FINANCIAL MARKET+INSTITUTION-LRNSMRT, Chapter 2, Problem 14P

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